Should my SMSF have a Corporate Trustee
An SMSF can be set up with either Individuals or as a Corporate Trustee. With an Individual Trustee structure all Members must be Trustees of the Fund. A Corporate Trustee Structure is when a company acts as the Trustee of the Fund. A Corporate Trustee can allow a single person to act as Trustee and be the sole Member of the Fund.
Statistics
In recent years the use of Corporate Trustees increase compared to Individual Trustees. Around 10 years ago the ratio of Individual Trustees was around 80% for new Fund setups. This has change in more recent years as SMSF’s are now being set up with Corporate Trustee structure more frequently. Around 80% of SMSF’s are now set up using a Corporate Trustee structure and only 20% of SMSF’s having an Individual Trustee Structure. The reason for this may be the advantages it offers in asset protection, administration efficiency and succession planning compared to having Individual Trustees.
Individual vs Corporate Trustee for Your SMSF
Corporate Trustee advantages and disadvantages within an SMSF
Advantages of using a Corporate Trustee:
Enhanced Asset Protection: A Corporate Trustee is a separate legal entity, which creates a clear legal barrier between the SMSF’s assets and the Members’ personal assets. This provides greater protection if the Fund is sued, generally limiting any liability to the assets within the SMSF.
Changes to Members: With a Corporate Trustee, the company remains the legal Trustee even if Members join, leave or pass away. This means that you will only need to update the company Directors rather than re-register all the SMSF assets, which saves time, effort and paperwork especially if the Fund owns property or other long-term investments.
Loans and borrowing: Although it is not a legal requirement, Banks and Lenders often prefer dealing with SMFS’s that are structured with a Corporate Trustee. This means that if you are looking at investing in property with a Individual Trustee structure, a Bank or Lender may deny your request for a loan or request that you change to a Corporate Trustee structure. This is because it makes a clear distinction that the investment is under the Fund and not a personal investment, ultimately making a more simple and easier process for the Bank.
Single Member Funds: Having a Corporate Trustee allows for those who would like to be the only Member of their Fund. As the company is the Trustee of the Fund, it avoids the need for a second Individual Trustee. Meaning that the single Member will have full control over running the SMSF.
SMSF Administration penalties: If Superannuation laws are breached, penalties may be imposed on the SMSF Trustees and these penalties cannot be paid or reimbursed by the SMSF. If your have an Individual Trustee structure you can have up to six Trustees, therefore you can receive up to six penalties. Whereas only one penalty can be issued with a Corporate Trustee structure as there is only one Trustee.
Disadvantages of using a Corporate Trustee:
Higher Set up Fees: When setting up an SMSF with Superannuation Warehouse, we charge $450 for setting up an Individual Trustee structure, whereas for a Corporate Trustee structure we charge $1,400.
Annual ASIC Fee: With a Corporate Trustee structure, your company is registered with ASIC and they charge an annual fee of $67 which can be paid from your SMSF’s bank account.
Disagreements: In a Corporate Trustee structure, when there is a disagreement between the directors, for example a decision on an investment. The decision will be decided based on what the
majority rules. Meaning as a Director you may not always have that sense of control over the decision making. In an individual structure the decision making must be unanimous.
Individual Trustee advantages and disadvantages
Advantages of using Individual Trustees:
Lower Set up cost and ongoing fees: As mentioned before, we charge $450 for an Individual Trustee set up, which is a lower cost compared to the Corporate Trustee structure. Also, due to an Individual structure having no company, there is no need for the annual ASIC fees, making the annual cost lower than the Corporate Trustee structure.
Simpler initial setup: Setting up an SMSF with Individual Trustees is straightforward. You just appoint the Members as Trustees and establish the Trust Deed, without the extra step of forming a company. This makes the process faster and easier to get started.
Direct control by Members: With Individual Trustees, the Members directly manage the Fund without the additional layer of a company. Some Trustees prefer this simplicity, as it allows them to make decisions quickly.
No company administration: As there is no company registered for the Fund, all the administration required for this is avoided, such as company compliance obligations and maintaining company records. This can ultimately reduce the administrative burden for Trustees.
Disadvantages of using Individual Trustees:
Difficulty when Membership changes: If you want to add new Members, you must update the Trust Deed and change the Trustee details with the ATO. This can be time-consuming and complicated. A Corporate Trustee makes adding Members simpler since only the company Directors need updating.
Personal Liability: With an Individual Trustee structure, each Trustee is personally responsible for the SMSF. If the Fund gets into legal or financial trouble, the Trustees’ personal assets could be at risk. This level of personal liability doesn’t exist with a Corporate Trustee, which limits liability to the company.
Death of Trustee: If a Trustee dies or becomes incapacitated, the SMSF may be unable to operate properly until a replacement Trustee is appointed. Corporate Trustees provide continuity because the company continues regardless of changes in Directors.
Who regulates SMSFs in Australia
SMSF’s are regulated by the Australian Tax Office. Their function is to make sure that SMSF’s are compliant with superannuation laws.
ASIC is the regulator of companies and the establishment of a Corporate Trustee and the annual fees are payable to ASIC.
SMSF Trustee responsibilities
Being a Trustee comes with a lot of control over investment decisions in your SMSF. Having this control gives Trustees important responsibilities. Trustees are legally responsible for making sure that the Fund is operating within the superannuation laws.
A key responsibility is that you act in the best interest of the SMSF’s Members. For example, Trustees make investment decisions that are focused on providing retirement benefits and not for personal benefits or short-term gains. Following on from this, another responsibility Trustees have is managing the investments of the SMSF. This includes having a documented investment strategy that aligns with every Members’ needs and risk tolerance.
Another responsibility is keeping the Fund compliant. Trustees must ensure contributions are made correctly and all records are accurate and up to date. Each year, the Fund must lodge an annual return and undergo an independent audit. Superannuation Warehouse assists with these areas as we store SMSF records and lodge annual tax returns on behalf of your SMSF. Also, we include having your Fund’s audit process completed by external auditors. This demonstrates how we assist with keeping your Fund compliant.
Trustees also need to keep the Fund’s money separate from personal finances. SMSF assets can’t be used for personal purposes, even temporarily. Everything must be clearly documented and traceable to protect both the Fund and the Trustees.
LRBA’s and the use of Corporate Trustee
When purchasing property with loans, the banks are usually insistent on the use of a Corporate Trustee. If an SMSF is set up with Individual Trustees, we can establish the Corporate Trustee at the time of setting up a Bare Trust.
SMSF compliance obligations
When there is a Corporate Trustee in place for an SMSF, there is an annual fee payable to ASIC which can be paid directly from the SMSF bank account to ASIC.
Many accountants set up their office as a mailing address to ASIC. Although we are a registered ASIC agent, we don’t receive the ASIC annual notices and therefore don’t charge a fee for this service.
Also remember the company type for a Corporate Trustee is a special purpose company. This means the ASIC fee payable is less than the $320 charged for a trading company and the Corporate Trustee annual fee is $67.
As an ASIC agent we have online access to either change the company type or update company details with the regulator and perform this function for the Funds we manage.
Tax implications
The cost of setting up a Fund either with or without a Corporate Trustee is regarded as capital in nature and therefore not a tax deduction. However, if an existing SMSF with Individual Trustees decide to establish a Corporate Trustee, this fee can be paid from the SMSF and will be a tax deduction for the SMSF.
Minors in an SMSF
Children under the age of 18 can be Members of an SMSF. However, as a minor they are not able to be Trustees of the SMSF or a Director of the Corporate Trustee. Instead, their interest in the Fund must be represented by a Legal personal representative, which in most cases is the minors’ parent or guardian.
Should I set up my SMSF with a Corporate Trustee
In summary, the main two reasons to use a Corporate Trustee is if you are a single Member SMSF and don’t want to disclose your superannuation affairs with an extra person. The use of a Corporate Trustee is a good option for not having a second Individual Trustee in your SMSF. The second main reason is if you know the Fund will purchase property with a relatively high LVR ratio, say between 60 to 80% loans. In these cases, the lenders may be insistent on the use of a Corporate Trustee.
Its ultimately the decision of Trustees if they want to incur the extra costs of establishing a Corporate Trustee. Remember if you are cost conscious, you can always establish a Corporate Trustee at a later stage and the costs for doing this can be paid from the SMSF.
So make sure you know what type of investments you want to make with your SMSF and what Trustee structure to use when setting up the SMSF. The fees we charge are $450 using Individual Trustees and then an extra $950 for the Corporate Trustee company establishment, totalling a set up fee of $1,400.
The steps to follow instructing us to set up an SMSF is listed on our website.